German Two-Year Yield Drops Below Zero on Shift to Safety

A statue of a bull stands outside the Frankfurt Stock Exchange in Frankfurt. Photographer: Ralph Orlowski/Bloomberg

March 18 (Bloomberg) -- German government bonds rose,
pushing two-year yields below zero for the first time in 10
weeks, as Cyprus sought an unprecedented tax on bank deposits,
threatening to reignite Europe’s debt crisis.

Dutch and Finnish securities also rallied and Austria’s
10-year yields fell to a record as investors sought haven assets
amid concern the levy would spark a run on Cyprus’s banks. A
parliamentary vote on the measures, which were designed to
reduce the size of a bailout for the island nation, was
postponed for a second day until tomorrow. Italian and Spanish
bonds pared declines on speculation any contagion from Cyprus
will be contained.

“What is a surprise is that the smaller depositors aren’t
protected, which is triggering concern that we will get a bank
run,” said Michael Leister, an interest-rates analyst at
Commerzbank AG in London. “Bunds are supported and will remain
so at least for today.”

Germany’s two-year yield fell three basis points, or 0.03
percentage point, to 0.02 percent at 5 p.m. London time after
sliding to minus 0.003 percent, negative for the first time
since Jan. 2. The 0.25 percent note maturing in March 2015
climbed 0.05, or 50 euro cents per 1,000-euro ($1,297) face
amount, to 100.455.

A negative yield means investors who hold the security
until it matures will receive less than they paid to buy it.

The 10-year bund yield dropped five basis points to 1.41
percent after declining to 1.35 percent, the least since Jan. 2.

Vote Delay

Cyprus plans to impose a levy of 6.75 percent on deposits
of less than 100,000 euros and 9.9 percent on those of 100,000
euros or more to raise 5.8 billion euros. That would mean a
smaller bailout for the Mediterranean nation than the 17.5
billion euros earlier envisaged to avert a collapse of its
financial system.

Parliament will meet at 6 p.m. tomorrow to decide on
depositor losses, speaker Yiannakis Omirou told reporters in
Nicosia in comments televised live on state-run CYBC. A vote
scheduled for today was deferred to examine changes to
legislation, he said. Euro-area finance ministers plan to hold a
conference call at 7:30 p.m. in Brussels to discuss the matter.

Cyprus’s government bonds declined, pushing the yield on
the 4.625 percent security due in February 2020 up 157 basis
points to 10.13 percent, the highest close since Feb. 6,
according to data compiled by Bloomberg. The bid price for the
securities was 73.64, while the offer price was 76.233.

The yield on Cypriot notes due in November 2015 climbed 328
basis points to 12.80 percent.

‘Fairly Calm’

Cyprus accounts for less than half of one percent of the
17-nation euro economy. While the bonds of Europe’s higher-debt
and deficit nations fell today, Ireland, Spain and Portugal
remain among the best performers this year of 26 sovereign
markets tracked by Bloomberg and European Federation of
Financial Analysts Societies.

Portugal’s bonds dropped for a second day, with 10-year
yields increasing nine basis points to 6.04 percent after
jumping as much as 30 basis points.

“So far it seems like it’s fairly calm and if it can stay
that way that’s good,” said Allan von Mehren, chief analyst at
Danske Bank A/S in Copenhagen. “The markets are not too scared.
It is a big deal but everything depends on what happens within
the next couple of days. If we get a deal then it should calm
down very swiftly. That’s what I think is going to happen.”

Volatility on Finnish bonds was the highest in euro-area
markets today, followed by those of Austria and the Netherlands,
according to measures of 10-year debt, the yield spread between
two- and 10-year securities, and credit-default swaps.

“The imposition of a deposit tax levy in Cyprus sets a
worrying precedent and has potentially wider ramifications than
just a local bank run,” Andre de Silva, head of Asian rates
research at HSBC Holdings Plc in Hong Kong, wrote in a note to
clients. “Risk-aversion should dominate this week.”

Germany’s debt has lost 0.5 percent this year through March
15, according to indexes compiled by Bloomberg and the European
Federation of Financial Analysts Societies. Italian bonds
returned 0.3 percent, and Spain’s securities gained 3.7 percent.